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For many people going through a divorce, managing finances can get overwhelming. Between legal fees and maintaining two separate households, people often feel like they are stretched to the breaking point. Which is why they often want to delay any additional expenses. Yet trying to cut corners by putting off important matters can backfire and result in devastating consequences.

 

This is especially true when it comes to a Qualified Domestic Relations Order (QDRO). When certain retirement assets are to be divided as part of a divorce agreement or judgment, a QDRO is often required. Yet since a QDRO deals with an asset that may not be available for years (or even decades) later, the spouse who is entitled to receive a retirement benefit via QDRO often delays in acquiring this valuable document in order to save a few dollars during the divorce.

 

However, delay can be very harmful for the person on the receiving end of the QDRO benefits – the alternate payee.

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If a divorce involves a qualified retirement plan that will be divided, one person you should get familiar with early on is the administrator of the plan. This is the individual who holds the key to many aspects of the Qualified Domestic Relations Order (QDRO), the legal document required to actually split the retirement account.

 

And just like every divorce, no two QDROs are alike. Differences in plan policies and procedures, the agreements reached by the spouses and myriad other factors mean that every QDRO is unique and requires careful attention during preparation and execution.

 

Which is where the plan administrator comes in. Along with any policies and procedures information they have, you also want to ask them for model copies of a QDRO. They should have such documents available. These model forms are helpful to familiarize yourself with plan particulars, and to use as a starting point for negotiations with the other side.

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In divorce cases that involve division of qualified plan retirement accounts, the issuance of a Qualified Domestic Relations Order (QDRO) will usually be required. However, many divorce attorneys (or spouses who divorce without attorneys) are unfamiliar with the QDRO process.

 

Even if you’re not planning on drafting the QDRO legal document yourself, it pays to thoroughly understand the full QDRO process. There are five basic steps to preparing a valid QDRO.

 

Step 1 - Collect Information

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Posted by on in Common QDRO Mistakes

If you’re going through a divorce and have a complicated property division that includes retirement account division, it is easy to let things slip through the cracks. But losing sight of the forest for the trees often comes with unintended consequences.

 

One area where mistakes often happen is dividing retirement accounts. And, in some cases, the mistake comes from a failure to notify the plan administrator of the proceedings.

 

Some plans require a legal document called a Joinder before they will implement any Qualified Domestic Relations Order (QDRO). A joinder is a legal document that is served on the Plan once it is known the Plan will be subject to division. The Joinder notifies the plan that a former spouse is claiming a right to some of the Plan benefits.

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Given the potential complexity of preparing a Qualified Domestic Relations Order (QDRO), most family law attorneys will offload the task of QDRO preparation to a professional who focuses his or her practice on drafting these unique documents day in and day out.

 

Still, it is important that any lawyer who deals with QDROs understands the key questions to ask during the negotiation process. Failing to understand the nuanced information that can adversely affect the acceptance of a QDRO by a plan administrator can send negotiations back to square one.

 

Do you have a copy of the plan documents?

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If you have a Qualified Domestic Relations Order (QDRO) in your future – for yourself or for a client – it goes without saying that you need a solid understanding of the process, the requirements and the rationale behind ERISA law.

 

For anyone involved with QDROs, an indispensable resource is a publication put together by the Department of Labor. This helpful electronic document covers all facets of a QDRO. It is a great resource for answering questions you might have about the what, why and how of these important divorce-related documents.

 

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While most people understand the most common reason for using a Qualified Domestic Relations Order (QDRO) – division of property in a divorce, there are other important uses for this important legal document.

 

Child Support

A QDRO can order payments be made to an alternate payee for purposes of child support. This is an often-overlooked use of a QDRO, but it is often the best way to ensure payment of initial support orders, enforcement of an existing order or payment of retroactive child support.

 

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When a Qualified Domestic Relations Order ( QDRO ) is used to divide a retirement account during divorce, a straightforward rollover from the plan participant’s plan to the alternate payee’s eligible retirement account is a non-taxable event. However, in many cases, the alternate payee elects to receive some cash from the distribution.

 

While income tax liability is always triggered by such decisions, the alternate payee can avoid the early distribution penalty. How? By electing to receive the cash at the same time he or she elects the form of distribution before the rollover of the benefit into his or her eligible plan. If done simultaneously, then the penalty is avoided. However, if the alternate payee rolls everything over and then decides to extract cash, the penalty will be applied.

 

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Posted by on in Common QDRO Mistakes

While it is usually a very good idea to hire a professional to prepare any Qualified Domestic Relations Orders required in a divorce, everyone involved with the QDRO process must have a working knowledge of the basic terminology used. There are certain terms you will come across whenever you are dealing with a QDRO, and understanding them is a must.

 

Alternate Payee – This can be a spouse, former spouse, child, or other dependent of a plan participant, who is recognized by a domestic relations order as having a right to receive all or a portion of the benefits payable under the plan. 29 U.S.C.A. §1056(d)(3)(J).

 

Plan Participant – This is an employee or former employee who is entitled to a benefit from an employee benefit plan. 29 U.S.C.A. §1002(7).

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If part of your divorce involves receiving a share of your ex-spouse’s retirement account, then you are likely familiar with the concept of a Qualified Domestic Relations Order (QDRO). This is the legal document that tells the plan administrator how the account should be divided.

 

If you are the recipient of such funds, you are known as the ‘alternate payee,’ and you may be wondering about the taxability of these funds. Whether the IRS will expect you to pay taxes on any QDRO proceeds depends on how you handle the distribution.

 

Watch this short, informative video that explains your options.

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Similar to the more prevalent 401K, a pension’s primary purpose is to provide cash flow to an employee upon retirement. However, unlike a 401K and other similar accounts, employees do not generally make contributions to pension plans. Instead, the employer exclusively funds the benefits, and the employee receives a regular distribution (usually monthly) upon retirement.

 

When a couple divorces and a pension plan is part of the marital estate, the pension may be divided by the court as part of the divorce. Determining the appropriate value for a pension requires scrutiny of the amount of vested and unvested monthly benefits accrued, the age of the recipient, and length of time to eligibility for payout. Like most assets, pensions normally are required to be valued for settlement or trial purposes.

 

Determining the net present value of a pension or other complex retirement assets require expert analysis. The valuation expert will need to review the plan document and a current benefits statement. Often these documents take significant time to acquire. This is unlike defined contribution plans, where plan participants often receive regular statements (monthly or quarterly) that spell out the current value of the account.

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For many couples facing divorce, especially those in long-term marriages, retirement accounts often make up the lion’s share of their joint assets. After decades of contributions, these accounts often contain very high values, and it is understandable that each party wishes to keep their own accounts for themselves. And sometimes that is possible.

 

However, at times there is disparity between the accounts (or only one account at all), in which case division of these assets is required. When an agreement is finally reached, use of a Qualified Domestic Relations Order (QDRO) is often necessary to divide a retirement account.

 

While the parties will often negotiate and agree on who bears responsibility for preparing and paying for the QDRO itself, they often overlook an insidious and potentially expensive cost – the fee that may be charged by the plan administrator for processing a QDRO. In some cases, these “processing fees” may run well over $1,000.

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If you’re going through a divorce, expenses pile up quickly. Which is why many of my clients want to know if they can receive a lump sum cash distribution from their Qualified Domestic Relations Order (QDRO). After all, starting over with a clean financial slate can be a very appealing idea.

 

But whether you can receive a cash distribution from a QDRO depends on the type of plan involved.

 

If your ex-spouse had a defined contribution plan, like a 401K, and there is a cash balance available that is divided, then you should be able to receive some (or all) of your share of the proceeds as a cash distribution. However, it is important to understand that there are tax issues involved with such distributions.

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Dealing with Qualified Domestic Relations Orders (QDROs) can be a minefield of malpractice for the non-QDRO expert. While a QDRO is often a key component of many divorce settlement agreements, too often the parties and their attorneys don’t fully understand the details behind these complex documents.

 

In Part One and Part Two of this series, I explained some of the most common mistakes made when handling QDROs during a divorce. In this final installation, I offer a few final observations of common errors I’ve seen in my more than 10 years of working with attorneys and clients to prepare QDROs.

 

Failing to Conduct Proper Discovery

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There are many ways malpractice can arise, but one of the most common is simply a lack of knowledge about complex topics. This is especially true when it comes to dealing with a Qualified Domestic Relations Order, commonly referred to as a QDRO.

 

These specialized documents, when properly drafted, can make the division of retirement assets a relatively smooth and error-free process. On the other hand, when a QDRO contains errors, it can turn marital property division into a landmine of post-judgment litigation.

 

In Part One of this series, we covered several of the most common errors associated with QDROs. Today we bring you a few more.

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Malpractice is a word that every attorney dreads. And while no lawyer intentionally sets out to make mistakes that open them up to liability, it is often a simple lack of knowledge that leads to liability issues down the road.

 

After ten years of working with attorneys and their clients to prepare Qualified Domestic Relations Orders (QDROs) and other retirement account division paperwork, I have seen, first-hand, some very common mistakes that are made when it comes to dealing with these complex documents.

 

Improper Delegation of QDRO Drafting Responsibility

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It may seem intuitive to approach the US Department of Labor to seek guidance on individual Qualified Domestic Relations Orders (QDROs). After all, this is the government agency tasked with creating and enforcing the ERISA rules surrounding these legal documents.

 

However, the Department of Labor refrains from offering advisory opinions on whether a domestic relations order qualifies as a QDRO. Why? Because their position is that whether an order is a QDRO requires an interpretation of the specific plan’s provisions and application of those facts to the case at hand.

 

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ERISA laws state that the plan administrator must determine whether a domestic relations order qualifies as a QDRO within a “reasonable time.” What is reasonable depends on the unique circumstances of every case.

 

One way you can speed the process along is by ensuring that your proposed QDRO is clear and complete when submitting it for plan administrator review. Also submitting it before you obtain the court’s signature will help identify any missing information or clarifications needed.

 

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Although death of either party is probably the furthest thing from anyone’s mind when negotiating the Qualified Domestic Relations Order (QDRO), planning for all possible outcomes must be considered.

 

Failing to take into account (or even understand) what happens to the alternate payee’s QDRO benefits in the event he or she passes before the plan participant is one of the most-often overlooked issues in a QDRO. Most model QDROs – the fill-in-the-blank forms provided by the plan itself – don’t even bother to address the death of the alternate payee.

 

This is why it is very important that specific language addressing the “what ifs” of an alternate payee’s death be included in every QDRO. This language must also comport to the plan’s own rules and limitations.

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When you’re going through a divorce, the last thing on your mind is probably the tax man. Unfortunately, there are a number of ways for the unwary to find themselves with unexpected tax obligations as a result of their divorce.

 

One of the most common areas is in splitting up retirement savings. Whether you’re dividing a qualified retirement plan (like a 401K) or an IRA, failing to follow proper procedure can leave you with an unexpected tax bill and penalties.

 

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